How to improve chances for bank loan

Banks are making more loans to small businesses according to the latest U.S. Small Business Administration report.

But that’s actually a little misleading, since small business lending in overall dollar terms continues to decline — although that decline has slowed.

Total number of loans under $1 million was up 10.4 percent last year, and loans under $100,000 posted a 12.3 percent jump. But aggregate dollar amounts are still falling. In other words, banks are making more — but smaller — loans to business owners.

With banks continuing their tight-fisted ways, getting a small business loan at the level you might need is still no easy matter. If you plan to apply for a business loan, you’ll want to prepare in advance by knowing how to navigate in today’s environment.

These six tips will help you develop a beneficial relationship with a bank and prepare your business to get a loan.

Get to know the bankers at several local institutions. Before requesting a loan, find out which banks in your area make loans to firms like yours. Some banks specialize in business loans; others don’t. And some specialize in lending only to firms in certain industries. Others lend only to those in certain stages of the business life cycle (no startups, for example). The best way to find out is to simply ask the bank, or check with other business owners.

Your goals should be to work with bankers who understand your industry. A banker who’s savvy about your industry can also offer helpful financial advice. They’ve probably worked with firms facing the same industry-related problems as you, and can provide financial products tailored to your firm’s needs.

Know how to briefly summarize your firm’s value proposition and your strategic plan for delivering on it. If you can’t clearly articulate why customers should do business with you and how you’ll effectively compete in your market, the chances of getting a loan are slim.

Develop a business plan with three scenarios: Best case, most likely case, and worst case. You want the banker to understand all three since you’re asking for support through good times and bad. Also, be prepared to discuss in detail the assumptions behind those scenarios.

Think like a banker. Understand and be realistic about the risks of operating in your industry. Share your ideas on how to mitigate those risks. The bank will do a risk analysis anyway, so it’s important to help out. Most likely, you can provide a perspective that the banker hasn’t considered.

Develop at least two ways to repay the loan. Bankers look for primary and secondary loan repayment sources. And for the sake of your business, you should, too. You are in the best position of anyone to envision repayment alternatives, so be sure to discuss these options ahead of time. These might include pledging business or personal collateral or a loan guarantee by the firm’s owners, suppliers or customers.

The more certainty that the banker has about your ability to make payments, the more likely it is you’ll get the loan plus the best interest rate.

Don’t ask for loans that should be funded with equity injections. Bankers aren’t paid to take equity risks; they get paid to make solid loans that will be repaid on time. If your needs are best met by, say, an angel investor who’ll provide capital in exchange for an equity stake in your business, that’s where you should look for money.

Anticipate their questions. For example, the bank will want to know how you plan to use the money. Banks often have policy restrictions on the types of loans they can make, and sometimes change those policies as market conditions change. They’ll also want to know how reliable your financial information is, what kind of reputation you have as a business owner, and why you really need to borrow.

Some reasons to borrow are good, and some aren’t. A loan to help a profitable business keep growing is good. A loan to prop up a sinking business, or to support a business owner’s lifestyle, isn’t.

Reach Daniel Kehrer at bizbest.com. Follow him at twitter.com/140Main.

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